JUDGMENT MANZOOR HUSSAIN SIAL, J.--1. Messrs Dawood Hercules Ltd, petitioner herein, is a Joint Stock Public Company engaged in manufacturing Chemical Fertilizers and is assessee under the provisions of Income Tax Ordinance, 1979. The petitioner's annual assessment returns were scrutinised and final orders passed by the concerned Income Tax Officers.
2. It was only on 2nd March, 1985 that respondent No. 1 issued notices under section 65 of the Income Tax Ordinance, 1979 for re-opening assessm ents made in respect of the years 1979-80, 1980-81 and 1981-82 on the ground that the. Petitioner computed and claimed 'workers participation funds' hereinafter referred as 'Fund' on the entire profits including the amount allegedly received by way of subsidy from the Federal Government. This in his opinion could not be included under sub-section (3) of section 87- C of the repealed Companies Act, 1913 and worked out excess participation funds, for that period.
The petitioner replied to the notices and maintained that the amount paid to the 'fund' is an allocation made to the 'fund' and petitioner entitled to claim deduction, the amount so allocated to the scheme to arrive at taxable income. The fiscal concessions to the company are admissible under the provisions of paragraph 8 of the Schedule read with section 2(c) of the Companies Profits (Workers Participation) Act, 1968, whereas subsidy is a donation or a grant given by Government to the private persons- or company to assist in the establishment or to support enterprise deemed advantageous to the public. The Income Tax Officer did not agree to the explanation tendered by the petitioner. The petitioner filed revision before the Commissioner Income Tax, Central Zone, which was rejected on 12th December, 1985 by him by observing that all compensations refunds provided by the Government constitute 'subsidy' in the broader sense, hence this petition.
3. Learned counsel for the petitioner contended that the amount paid to the fund every year (a) 5% of its profits under section 3 of the Companies Profits (Workers Participation) Act, 1968, is an allocation to the 'Fund' and the petitioners entitled to claim as deduction, the amount so allocated to the scheme to arrive at the taxable income. The assessee is entitled to claim deduction for the full amount allocated to the scheme under the Companies Profits (Workers Participation) Act, 1968. The respondents have no jurisdiction to compute the amount of contribution admissible as deduction, on the assessment, presuming it 'subsidy' or grant given by the Federal Government It was further contended that the amount in question became due to the petitioners being higher than computation for the earlier year which formed the basis of the payment^of development surcharge pending final determination of the ex-factory price. The adjustment of the amounts in no case can be construed as 'subsidy' or grant. It was also contended that re-opening of the proceedings under section 6 3 of the Income Tax Ordinance, 1979 attracted the principle of partial res judicata. In support of his submission he relied .On Commissioner of Income Tax, East Pakistan, Dacca vs. Wahiduzzaman PLD 1965 SC 171. Learned counsel for the petitioners lastly referred to circular issued by the Central Board of Revenue on 13th August, 1985 wherein the payment of 'price differential' by the Govern^ ment to the Company is held no subsidy within the meaning of sub-section (3) of section 87-C of the Companies Act, 1913. It is contended that under section 8 of the aforementioned Act, the instructions/circulars issued by the Central Board of Revenue are binding on all Income Tax Officers subordinate thereto, and they are under legal obligation to give effect to the same. He relied on Tata Iron & Steel Co., Ltd. Vs. N.C.
Upadhyaya and another (The Income Tax Reports, Vol. 96 (Bombay) page 1).
4. Ch. Muhammad Ishaque, Advocate, learned counsel representing the respondent was unable to controvert the legal position specially after having studied the circular issued by the Central Board of Revenue on 13th October, 1985 on the subject. He, however, contended that the petitioners should have raised this point before the Income Tax Officer, in the first instance, before invoking the Constitutional jurisdiction of this Court in the matter.
5. I have considered the contentions raised by learned counsel for the parties and have gone through the documents on the file. Section 3 of the Chemical Fertilizers (Development Surcharge) Act, 1973 reads:-- "3. Levy of development surcharge. -(1)
Subject to the provisions of this Act, every company shall pay to the Federal Government a development surcharge equal to the differential margin in respect of a chemical fertilizer produced by it, including a chemical fertilizer so produced and held in stock immediately before the commencement of the said Act. (2) It is clear that the development surcharge payable under the aforesaid provisions of law is equal to 'differential margin'. Section 2(c) of the aforesaid Act defined the 'differential margin' as under:- "(c) differential margin, in relation to a chemical fertilizer, means the amount by which the maximum sale price of the fertilizer exceeds its maximum retail selling price as inforce immediately before the commencement of the Chemical Fertilizers (Development Surcharge) Ordinance, 1973 (VI of 1973), hereinafter referred to as the said Ordinance, or, as the case may be, the amount by which its maximum sale price exceeds the aggregate of its ex-factory price and the incidental charges". The expression "ex-factory price" mentioned in clause (c) above is defined by clause (d) of section 2 to read as under:-- "(d) ex-factory price, in relation to a chemical fertilizer produced by a factory, means such ex-factory price of that fertilizer as the Federal Government may, by notification in the Official Gazette, declare to be the ex-factory price having regard to the cost of production of such factory.". Under section 6 of the Chemical Fertilizers (Development Surcharge) Act, 1973 the amount of development surcharge payable under section 3 is to be allowed as deduction Section 6 provides:- "6. Allowance to be made for development surcharge for purposes of income tax.--Notwithstanding anything contained in any other law, the amount of the 'development surcharge' paid by a company or stockist under section 3 shall be an expenditure for which allowance is to be made in computing profits or gains under sub-section (2) of section 10 of the Income Tax Act, 192Z". Obviously neither it is possible for the Federal Government nor for the assessee, to work out in advance the actual ex-factory price of each year. The development surcharge is collected tentatively on the basis of last development surcharge as approved by the Government. The company-petitioner becomes entitled to refunds which are credited to the sales account of the year of receipt from year to year and the taxes are paid on the entire refunds received by the company. Paragraph 8 of the Schedule under the Companies Profits (Workers Participation) Act, 1968 also provides:-- "8. Fiscal concession to the Companies.-Ml companies to whom the scheme applies shall be allowed the allocation made to the scheme as a deduction to arrive at the taxable income.". The amount specified as excess allocation to the 'Workers Participation Fund' for the disputed period was in fact refundable development surcharge leviable under section 3 of the Chemical Fertilizers (Development Surcharge) Act, 1973 and not subsidy as considered by the respondents. The term 'subsidy' in legal parlance means something, usually money, donated or given. The amount in question being contribution admissible as deduction and cannot be described as a 'subsidy'. The amounts in dispute became due to the petitioner, as a result of ex-factory price eventually determined by the Ministry of Agriculture, being higher than the computation for the earlier years which formed the basis of payment of development surcharge, pending final determination of the ex-factory price. This interpretation also finds support from the latest circular dated 13th August, 1983 issued by the Central Board of Revenue to the Regional Commissioners of Income Tax, wherein the payment of 'price differential1 by the Government to the company is held not a 'subsidy' within the meaning of sub-section (3) of section 87-C of the Companies Act, 1913 which circular otherwise has binding force for the Income Tax Officers to give effect thereto. As regards the next contention of learned counsel for the respondents that the petitioner should have raised this plea before the Income Tax Officer in the first instance, suffice it to say, that the petitioners did raise the plea before the Income Tax Officer as well as before the Income Tax Commissioner but the same was rejected, lt would have been futile exercise, for the petitioners to re-assert and re-agitate the plea which had already been considered and finally rejected in revision by respondent No. 2 on 12th December, 1985.
6. The upshot of the above discussion is that the impugned orders passed by the respondents and proceedings initiated by them in pursuance whereof, are declared to be of no legal effect.
7. This petition is allowed with no order as to costs.